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How to Invest in Currencies

Therefore, at best, we can see where an economy is headed three to five years into the future. Longer than that, all bets are off. Shorter than that is pure gambling. Of course, even predicting an economy's strength for the next few years can be difficult, but it's the "sweet spot" in which you are most likely to make good currency bets. Investing, after all, is about consistently making "good enough" decisions.

Another Twist

When you invest in a currency you are making a statement not just about one economy, but about two. For example, if you live in the U.S. and you are investing in the euro via foreign exchange (Forex or FX), you are making a statement about the relative strength of the European economy vs. the U.S. economy.

Foreign Exchange Broker Gets Boost From Retail Investors

Essentially, you are selling U.S. dollars and buying euros. Then, to capitalize on your profits, you sell the euros you bought and buy U.S. dollars again. By going through this process you are saying, "I expect the European economy to do better than the U.S. economy."

That said, the following are the key issues you want to think about when evaluating an economy to invest in. It may not surprise you that these factors are quite similar to the ones you should think about when investing in a company.

High growth. Overall, this is the most critical factor. When an economy is growing, its assets (like companies and real estate) rise in value. When this happens, investors -- both internal and external -- invest in the country, and this results in greater demand for its currency, and hence the rise in its value.

Having grown its economy 10% to 11% annually from 2004 to 2006, China is often cited as a "high growth" country. In the same region of the world, you'll find Vietnam growing at around 8% annually and Singapore at 6%.

Think of China as a large-cap stock and Vietnam and Singapore as small-cap stocks.

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